Government aiming to simplify VAT on capital goods scheme

The UK government has launched a consultation that aims to simplify VAT on capital assets in order to 'reduce the administrative burden of the capital goods scheme' (CGS).

The CGS allows businesses to make adjustments over time to the initial VAT recovery related to the purchase of specific types of capital items.

Although the recovery of VAT on these items is made on a one-time only basis, within the year of purchase, adjustments must be made in subsequent years. The size of those adjustments depends on the proportion of taxable use of the asset. According to the government, administering the CGS can be 'problematic', and some of the underlying assumptions of the scheme are 'outdated'.

Complexity is added to the CGS calculations by the partial exemption that applies to businesses that make both taxable and exempt supplies. This requires the business to submit a statement of partial exemption special methods (PESMs) for HMRC's approval. This process increases the administrative workload on both the business and HMRC.

The government is now consulting on how PESMs can be simplified, and is also reviewing the current partial exemption de minimis limit.

Additionally, HMRC is asking for feedback on how partial exemption and the CGS could be streamlined with Making Tax Digital (MTD).